Posts Tagged ‘risk’

Stick To The Knitting – Or Diversify?

Tuesday, April 8th, 2014

I’ve followed software developer 37signals for a few years. I read CEO and founder Jason Fried’s column in Inc. magazine.Should companies stay focused on their core strengths or diversify?

I use their products. Some of our clients like Basecamp, their project management software, to manage strategy execution. We use Highrise for ProfitPATH’s CRM system.

I have a pretty high regard for the company and was intrigued, therefore, by an announcement they made in February.

Moving forward, they are going to focus on a single product – Basecamp. To make the point they even changed the company’s name from 37signals to Basecamp.

According to Fried, the product accounts for over 80% of the firm’s revenue¹. So some would argue that they must diversify, put resources and effort into growing other products to spread the risk. Otherwise they are making a big mistake, putting all of their eggs in one basket.

But are they?

Keeping a company focused on its core strengths is not a new idea. In the 1950’s Peter Drucker spoke of the need to make choices about what not to do. Peters and Waterman became famous for the phrase “stick to the knitting” when “In Search Of Excellence” was published in 1982.

What if, instead of focusing on the fact that Basecamp is 80% of the company’s current revenue, we ask 3 completely different questions?

  • What share do they have of the market for project management software?
  • What features do users want that Basecamp doesn’t currently offer?
  • Can the company grow market share, and add those new features, without increasing their payroll or overhead?

There are companies who focus tightly on a limited product offering and whose profitability is well above the average for their industry – e.g. Trader Joe’s, the U.S. retail chain².

On the other hand, there are companies who have diversified too much and who have failed. A recent example is Google’s acquisition of Motorola Mobility (which they later sold to Lenovo).

There is no one answer that can be applied universally. There are a number of factors which affect decisions like this. So I will continue to watch 37signals/Basecamp with great interest.

By the way, can anyone think of a Canadian company that has also changed its name to the name of its leading product…………..?

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¹ “When Staying Small Is The Bigger Bet”, Jason Fried, Inc. Magazine, March 2014, page 108
² “Basecamp’s Strategy Offers A Useful Reminder: Less Is More” Ron Ashkenas’ HBR Blog, 10 Feb 14

 

If you enjoyed this post you’ll also enjoy Don’t Fool Yourself……

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Jim Stewart is the founding Partner at ProfitPATH. He has been working with business owners for over 16 years to increase profits and improve the value of their companies. LinkedIn

 

 

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One Way To Destroy A Family Business

Tuesday, October 1st, 2013

Do you recognize this individual?Coddled offspring can destroy a family business

Well-dressed, well-groomed, drives a late model luxury car.

May be charming and pleasant. In some cases, however, they can be arrogant, abrasive and (over) confident.

Not yet, too vague? OK, here are some other clues.

He or she has:

•  Worked exclusively in their family’s business.
•  Reported directly or indirectly to a parent for most, or all, of their career.
•  Never received 360-degree feedback on their performance.
•  Been promoted beyond their capabilities.

In addition:

•  They’re paid above the market-based compensation for their position.
•  Their behavior is often outside the boundaries of acceptable value-based behavior of the company.

Now are you closing in?

At one time or another, professionally or socially, we have all met the coddled or pampered son or daughter.

Some might say they’ve been spoiled. I’m not sure it’s that simple.

Here’s the point. In the eyes of the doting parent they can do no wrong. But, in reality, they inflict damage on the family business. And the longer they are around, the higher they climb, the greater the potential for them to do fatal damage.

Non-family employees react in one of two ways. Those who need their income find ways to keep quiet and live with the situation. Those who are mobile move. Both outcomes hurt the company.

The only people who can fix this situation are the other family-owners and, possibly, long-term employees who have earned the deep trust of the business owner.

The owner/parent will not thank them for doing so. In fact the parent’s initial reaction can range from dismissive to very angry. However, if the parent doesn’t come to terms with the situation, they risk losing all of the family wealth tied up in the company.

What can be done?

We tell our clients to let their children go and work in another company before they start, full time, in the family business.

Ideally, they work in a corporation where they get honest, regular feedback about their performance. But another family business will do – provided 2 conditions are met. It’s using performance management systems and the owners are neither friends of, or related to, the owner/parents.

For the owner/parents themselves it’s a little harder. Getting perspective on their children’s, or other family members’, abilities and performance, from a third party the owner can trust to be objective, is the best thing. A member of an Advisory, or traditional, Board can be very useful for that. But a friend or long-term business advisor can fill the role too.

Final words

When over-protected children are asked to leave the family company they often find it a great relief. They know they were in over their heads.

Ironic isn’t it?

You can find the article that inspired this post here.

 

If you enjoyed this post you’ll also enjoy Why Conflict In A Family Business Is Bad For Strategy

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Let’s Hold Consultants Accountable For Results

Tuesday, September 24th, 2013

For a Scotsman, true accountability occurs when results are linked to compensation.Let's hold consultants responsible for results

So I’ve tried various ways of linking our payment to our performance for most of the 12 years that I’ve owned ProfitPATH.

Why? In addition to the one above, there are 2 other reasons.

First, the people we work with are all taking risks. If we are to be credible, why should we be risk exempt?

Second, when I worked in corporations I hated paying consultants before I knew if their recommendations would deliver the results I wanted. When I started ProfitPATH I swore we wouldn’t do that.

It’s relatively easy to link our fees to our own performance.

We make sure the deliverables are clear and give the business owner what they want. We also tell our clients that they can stop an assignment at any time without any financial penalty. Just pay us our fees up to that point.

Linking payment to our clients’ results is a little more complicated.

Why?

Because of the number of things we have no direct control over. They include, for example, everything from the economy (be honest, did you guess the last crash would come when it did) to how they arrive at the profit line on their income statement.

But just because it’s complicated, that doesn’t mean we shouldn’t try.

And so we’ve experimented with a number of things. Like deferring a portion of our fees until the outcome of our recommendation becomes clear; or linking part of our payment to the achievement of a result.

There are other ways to hold consultants accountable.

A client can, for example, refuse to act as a reference; or communicate their disappointment as widely as possible; or withhold part, or all, of the fees. But these are all post completion options.

Other alternatives, that we recommend, are frequent, regular progress reviews. When coupled with the “terminate at any time with no penalty” policy I mentioned above, these reviews carry some weight.

Holding us accountable is part of my wider belief that the management consulting industry needs to take some of its own advice. It has to change its business model.

Now Clay Christensen, author of “The Innovators Dilemma” and one of the leading thinkers about innovation, has weighed in. A Harvard academic, and former consultant with the Boston Consulting Group, he believes that the consulting industry is ripe for disruption.

He’s joined by Ron Ashkenas, managing partner of a consulting firm and academic at Berkley, whose article first set me off on this rant.

I’ve been convinced for years that change needs to happen. It’s encouraging to see thinkers of their caliber saying similar things.

 

If you enjoyed this post you’ll also enjoy Why You Need A Consultant With Hands-On Experience

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Pilot, Perfect, Scale Up

Tuesday, February 26th, 2013

You have to change what you’re doing now in order to grow your company.Change what you're doing to grow your business

That’s unavoidable – and it means taking risks.

But some changes are less risky than others.

For example, how much risk do you take selling a well-proven product or service to new customers? And how does that compare to, for example, investing in a new promotional campaign?

Let’s talk about that promotional campaign for a moment because lots of business owners have had a bad experience with one.

The challenge is that you have to spend money getting someone to create a new message which will get your prospective customers to do something you want.

The risk lies in the fact that the business owner has to pay for the new message and for getting it out there before they know if it will have the desired result.

But this is not entirely true.

You don’t have to pay for a full promotional campaign before you know if it will work. At the very least you can narrow the odds of failure and limit your investment.

How? By following a process called “pilot, perfect, scale up”.

For example, you can test as many variations of the message as it takes, on a small group of customers, until they see and hear what you want them to see and hear. That’s the piloting part.

Then, instead of emailing the message to everyone, you first send it to part of your database and check they are getting the message and, if necessary, make further changes. That’s the perfecting part.

Only when you’ve done that do you scale up and launch the campaign to everyone.

The same technique can be used for developing (or adding) new products. Pilot them by testing the concept and then the prototype with a few potential customers. Use their feedback to modify and develop your original idea.

Then roll it out locally. If there are unforeseen problems, you can perfect the new product/service by either shipping them back or getting support people out to customers relatively quickly and inexpensively.

Scale up by going for a regional or national launch only after managing the risks by taking the first 2 steps.

You can apply this process to almost any change or risk you have to take to grow. For example, want to:

•    Grow your retail business? Get one outlet running profitably by perfecting the systems and documenting the processes there. Then transfer them to other, remote locations. (Not exactly my idea, see Michael Gerber’s “The E-Myth”.)
•    Add new markets? Do it in increments rather than by put everything on the line by overstretching.
•    Hire a consultant? Give them a small project and see how they do with that before giving them the big one.

This seems so simple, so fundamental you may wonder why I’m even writing about it.

It’s because we continue to see situations where “pilot, perfect and scale up” should have been used and wasn’t.

 

If you enjoyed this post you’ll also enjoy Cop Out Or Common Sense?

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How To Keep Control When You Work With Consultants

Wednesday, November 3rd, 2010

Marie Wiese at Marketing CoPilot wrote in her blog last week that CEO’s begrudge – even hate – spending money on marketing services or marketing consulting. She says that’s because marketing feels like a series of unconnected projects and tasks with vague un-measurable results.

We often encounter similar objections when we meet business owners. Some haven’t worked with strategy consultants and just don’t know what to expect. Even those who have are concerned that they are getting into a situation over which they have no control.

Consulting assignments have a reputation for expanding beyond their original scope and budget. Then there are the results – or apparent lack thereof. Entrepreneurs and business owners who, by nature, want to be in control find this hard to deal with.

But it doesn’t have to be this way. Start by asking for a written proposal which contains the following 5 sections:

1. Our Understanding of the Situation. Look for a detailed description of the situation you now face and the factors which created it. This section should echo your discussions with the consultants – and should be written from their notes of those discussions.

2. Scope of Work. This should contain a step by step explanation of how the consultants will help you deal with the Situation. Ask for the full assignment to be broken into steps and laid out in a table with 3 columns:

  • A description of exactly what will be done by the consultants in each step.
  • A clear statement of the deliverable or deliverables for each step.
  • The resources that both the client and the consultant must provide in order to secure the deliverable(s).

3. Schedule. This section contains the estimated time required to complete each step. The consultant may provide a range of times if they perceive risk, e.g. they have not been able to examine documents being provided by you. Insist, however, that the lowest and highest estimates of the hours required, and the factors which determine them, are clear.

The Schedule should include a proposed start date and may have a target date for completion.

4. Fees and Payment. Preparing the Scope enables the consultant to determine who – e.g. partner, senior consultant, or research associate – will do the work. Completing the Schedule enables a realistic estimate to be made of the time required. Applying the rate for the person doing the work to the hours required to complete it generates the fee for each step. This section should also contain the total cost of the assignment. Ask for it to be broken out by partner etc.

Travel costs – e.g. mileage, air fares – or other expenses should be shown separately. (Note some consultants bill their clients for the time they spend travelling, others do not.)

We always include the statement, at this point, that no additional costs of any type will be incurred without the client’s prior approval.

Usually taxes e.g. HST are excluded from fees.

Make sure the proposal is clear on how and when the consultant is to be paid. In most cases, we send our clients an invoice when we complete a step and request payment on presentation. In this way they are constantly in control of how much they are spending on us.

5. Termination. Insist that you have the right to terminate an assignment at any time. Clarify the financial terms attached to termination before the work begins.

We tell our clients that if, if the deliverable(s) for any step are not completed, they can terminate the project at the end of that step. In that event we simply expect to be paid for the work we have completed.

There is no reason why entrepreneurs and business owners should not be in control when they work with consultants. Getting a clear, specific, written proposal will get you off to a good start. We’ll talk about other ways to stay in control in future posts.

Most consultants just want to deliver results – and we don’t want to be hard to deal with.

4 Reasons Why Every Business Should Be Sold…..Eventually

Thursday, July 22nd, 2010

We’ve had a couple of interesting conversations result from the last post. It warned against letting fear caused by the short term economic outlook drive you into making decisions which will damage the value of your business in the long term. The reason for building long term value is so that the owner can get a good price for the business when he/she is ready to do something else.

One conversation started when a colleague suggested that not all business owners expect or intend to sell their companies. (When I say “sell,” I’m including the transfer of ownership from one generation to the next.) I’ve always believed that, on a day-to-day basis, most owners are more concerned with making the year’s profits goals than the value of the business as an asset. But it had never really occurred to me that anyone would not consider selling either for the right offer or when they’re ready to retire.

I can think of at least 2 things that would affect your expectation of being able to sell. One is thinking that your company couldn’t be worth much and the other is believing that it wouldn’t be interesting or attractive to anyone else. I have met owners who believed one or both of those things. It happens if they have never talked to anyone about how a business is valued, or they are too close to (and overwhelmed by) the day-to-day challenges of their situation. But, provided there is enough time, it should be possible to position any business for sale.

But to have no intention of selling your business! That jolted every Scottish cell in my body – and then some! My friend argued that some people start businesses simply to keep themselves – and possibly family members – busy and to provide them an income. I couldn’t argue with that, particularly if it was a small business in a very specialized field, although I couldn’t think of anyone I knew who thought that way.

It just all seemed so illogical to me. Whether they own a small business or a larger one, all entrepreneurs take the same risks. It’s only the extent of the risk that varies. But surely the perception of risk varies with the person taking it. What may seem to be very little risk to one person can still keep another awake at night. In that case the same 4 reasons for selling apply to everyone.

The first 2 reasons are all about rewards – one for taking risks and the other for investing time.  Why would anyone take the financial risks – personal guarantees to Banks, liability for statutory deductions and civil lawsuits, working without healthcare and pension benefits and the missed opportunity of a steady income working for someone else (and that’s only a partial list) – for only a salary and bonuses? In the early years the salary (if there is one) will be lower than an employer would have paid, so the bonuses (when they come) may only be a way to catch up.

Best case is that the salary and annual bonuses pay for the dream car, boat or cottage, provide a nice home for the owners’ families and give their children access to healthy hobbies and a great education. But what about the money to take great vacations with their spouse or partner when the owner’s ready to move on, the kids have gone or when the owner’s ready to retire? That’s the sort of thing that the funds from the sale of the company are required for.

The second reward is for the long, long hours – the evenings, the weekends, the missed vacations – which business owners pour into their companies. The annual compensation may seem good in absolute terms – but try calculating an owner’s hourly rate. And the countless frustrations they deal with during those hours – demanding customers, unreliable suppliers, unsympathetic financial backers, difficult employees, to name but a few.

Reason #3 – No one lives forever – but a company can easily outlast a person. Think about Wal-Mart, The Body Shop and any company that continues to thrive after the founder has moved on. A business owner spends a significant portion of their life building something which generates profits and cash – and jobs – on an ongoing basis and which gives them enormous satisfaction. So, why would they not want to see it continue (as a legacy if nothing else)? Perhaps it’s a characteristic of entrepreneurs that they believe they’re indestructible, even in the face of overwhelming evidence of aging.

The final reason (at least for now) is that we want our kids to have more than we did. Ideally the business owners’ children would want to spend their lives doing the same thing they have done, running the business. If that is the case, fine. But if it isn’t, the child could grow into the Doctor who discovers the cure for cancer, or a successful businesswoman in a completely different field. Either selling to them, or selling for them to do something else, is a great way to give them a start.

This is why we remind every business owner who will listen that there are 2 reasons for growing a company. It’s why I remind people that every recession I’ve lived through has come to an end. And when that happens some companies take off more quickly than others. They’re the ones whose owners refused to be panicked into doing things they would later regret. They kept long term value and the selling price in mind – when making short term decisions.

Winning Business Ideas from “Kinky Boots”…….

Saturday, August 15th, 2009

I was indulging in one of my favorite Friday evening habits a couple of weeks ago, relaxing and watching a movie. On this particular Friday night my wife had decided (isn’t that how it works in your house?) that she wanted to see a movie that a number of people in her office had enjoyed. It’s called “Kinky Boots”.

It’s about a family run shoe manufacturer in the U.K. that has been producing a high quality product for four generations. (By the way the movie is based on a true story.) The hero inherits the business only to find that, while his father had led everyone to believe that the business was holding its own, it was, in fact, in very serious financial trouble. A visit to one of the firm’s largest customers revealed that its traditional market had been taken over by cheaper, lower quality, imported products (can anyone relate to that problem?).

The young owner has to begin immediately laying off long serving members of the workforce. While doing so, he gets a lecture from a young female employee who tells him that, instead of moping around asking “What can I do?” he should get out and find a new market niche (really, they actually use the word “niche” several times in the movie). She goes on to suggest that this was perhaps something they (management) should have done long before the firm got into trouble.

Without spoiling the plot for you – let’s just say there are alcohol and female impersonators involved – our hero does manage to find a new niche. It’s an easily identified group with a specific need which is not being met by the firm’s competitors. The group is large enough to generate sustainable profits and they want a quality product. The company uses its experience and knowledge base to develop a unique solution. It supplements that by attracting a designer with specialist knowledge of the niche’s thinking.

I couldn’t believe it. Right there in the middle of my Friday evening, was a movie about “Kinky Boots” giving pointers on leadership and an excellent example of how to develop a winning marketing strategy. And it was doing it in a far more entertaining way than many of the books and articles I’ve read or courses I’ve attended.

But there was more. The movie went on to deal with some of the other issues we face in this fast changing, demanding world in which we operate. For example, reaching quality standards which are different from those of the traditional business demands more of workers than has ever been done in the past. As an owner how do you communicate the absolute necessity of making the change? And make them understand that even if they are willing to do their traditional best it is no longer good enough? How do you push and how far do you push to maintain their enthusiasm while motivating them to do even more?

We know things never happen one at a time so while driving up quality our hero also has to meet a deadline for launching the product line. When the pressures mount on you how do you communicate a sense of urgency to a work force that already believes it is doing its best? And while you’re expecting them to change, is that enough, what about you, the owner? The movie’s example of the personal challenges owners face began at the beginning of the film when our hero decided to leave the firm. A simple sense of duty to his heritage and the employees after his father’s death pulled him back. But the changes required by the new strategy were so radical and the risks (including the personal, financial risks that all entrepreneurs take) of implementing it were so great that he had to develop enormous commitment to the success of the new direction.

Then there were the people issues which seem to dominate our lives. The company culture reflected the solid, traditional values and roles on which it was built. The potential solution, however, involved embracing customers with very different roles and values. And bringing the specialist designer into the firm raised all of the challenges associated with integrating minorities into the workplace.

Recognize any of this? Ever found yourself in a similar situation? Realistically most of us have had to deal with one or more of these issues one time or another. And it’s hardly unusual for several crises to erupt simultaneously (the perfect management storm).

I’m working with a couple of companies at the moment which missed opportunities to develop new niches when they were busy. I also see situations where owners ask “What can I do?” without knowing where to find the answer. (Alcohol and female impersonators are not universal “cure alls” and I certainly don’t recommend either or both.) Then there are companies that had a product for which they went to find a market, rather than starting with a market need first. Finally, some companies also pick niches that are too small or which require too much investment to ever yield a reasonable, sustainable profit.

But the challenges inherent in change, motivation and communication are ones which we all deal with on a day to day basis. And are ones with which we can all use some help.

Watch the movie and you’ll see how the characters made out. You’ll also see some examples of excellent strategies being put into practice – and the courage and persistence in the face of adversity that you know, as business owners, are required to implement them. You may even pick up a few tips – I know I did. And if you get nothing else out of it, you will be entertained.

 (In case you missed it…………..”Kinky Boots” is from the same team who created “Calendar Girls”).

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